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The beginning of the end for postage stamp

Richard Lawson

The British may have created the world's first postage stamp, but it was one of their Australian colonies that initiated stamped pre-payment for delivery of letters.

NSW Governor Sir George Gipps, unimpeded by a doubting parliament, acted on his own by announcing in November 1838 that letters embossed with a 1.5-penny stamp would be delivered free.

Eighteen months later, British postal authorities issued the famous Penny Black for official use there.

The innovation was a boon for the then 300-year-old Royal Mail and its much younger colonial cousins, in the business for only 30 years.

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And despite the technological advances in the 175 years since, we're still sticking postage stamps on letters.

The trouble for both the Royal Mail and Australia Post is that we are doing it less and less.

Digital technology has reduced the demand for letters, placing significant financial pressure on a service required by governments to deliver mail to any domestic location for a fixed price.

Letter volumes in Australia reached a peak in 2007-2008 with 4.6 billion items, but in the five years since they have fallen by more than a billion. You have to go back to 1994-1995 for volumes so low.

In the UK, the number of letters sent daily fell from 82 million in 2004 to 58 million in 2013.

It's a global trend, with letter volumes falling even faster in Europe, Scandinavia, South Korea, the United States and New Zealand.

The parcel business, on the other hand, is going through the roof on the back of online spending.

But unlike the letter business, Royal Mail and Australia Post run their parcel operations in a competitive marketplace. And unlike the letter business, parcel delivery is very profitable - provided you keep up with the competition.

Parcels generated $355 million profit in the last financial year for Australia Post, compared with its regulated mail business which reported losses of $218.4 million.

To remain competitive in parcels, postal services need capital to invest in new technology and on delivery logistics such as parcel lockers.

The Cameron government's reluctance to provide Royal Mail with capital led to its partial privatisation late last year.

In Australia, there are renewed calls to consider a similar path.

Graeme Samuel, a former chairman of the Australian Competition and Consumer Commission, has no doubts about what should be done with Australia Post.

"Of course it should be privatised, and of course it will be subject to the mother of all scare campaigns," he said this week.

His comments followed those of his successor Rod Sims who, while not naming Australia Post specifically, said remaining government assets should be sold to improve productivity.

Its former chairman David Mortimer concedes the postal service's letter business will suffer increasing losses unless radical change is accepted by the community.

The Cameron government tried to bridge the gap separating radical change and initial community concerns about privatisation.

It set a 90 per cent limit on private holdings in Royal Mail with at least 10 per cent to be held by its employees.

It also quarantined the post office network from privatisation, keeping it in a government-owned holding company that itself retains a 38 per cent share of Royal Mail.

Which is just as well, because the British government appears to have undersold its multibillion dollar asset.

Royal Mail shares are fetching nearly 70 per cent more than their float price, short-changing the government by about $1 billion. Fortunately, its own stake is now worth a lot more.

Analysts estimate that Australia Post could return the government as much as $4 billion in a sell-off. But Treasury would also lose the annual income stream that comes from owning it.

In the five years up to 2012-13, the cumulative dividend amounted to $881 million, not as much as the $1.5 billion the government received in the five-year period before that.

The decline in letter volumes, combined with the rising cost of maintaining a huge network of post offices and agencies, threatens not only to reduce dividends to government but also to inhibit Australia Post's ability to grow the profitable parts of its business.

To offset losses in its letters business, it wants the government to allow the cost of a basic stamp to increase from 60 cents to 70 cents in 2014.

It also wants approval to offer a wider range of trusted services - especially Centrelink transactions - and for an easing of limits on its commercial freedoms.

It's not hard to see why Australia Post needs more revenue for its letter service.

While volumes are declining, it has to fund a statutory universal obligation that requires it to be reasonably accessible to all Australians on an equitable basis, wherever they reside or carry on business.

It also needs to ensure that performance standards reasonably meet the social, industrial and commercial needs of the community.

In metropolitan areas, that means a daily week-day delivery service to every home and business; in remote rural areas, it means a weekly roadside delivery at the least.

To do that it needs 4400 retail outlets, including about 2500 in rural and remote areas, and 2446 roadside contractors.

Australia Post argues that the cost of postage has not kept pace with inflation, creating a 20-cent gap between the price of a stamp and the consumer price index.

Despite its public ownership, the organisation, under its CEO Ahmed Fahour - a former banker - has been able to invest heavily in its logistics network and digital platforms.

It has bought Qantas out of the StarTrack express freight joint venture and is at the leading edge of the digital environment, introducing 24/7 parcel lockers and trials of digital mailbox services. It has also outsourced many of its post offices to private licensees, an arrangement that is being scrutinised by a Senate inquiry.

But Australia Post believes that various interpretations of its enabling legislation have caused the shelving of potential commercial opportunities complementary to its core business.

At the same time, other international postal organisations, freed from government-imposed limitations and obligations, have been able to grow substantial commercial businesses.

The Royal Mail experience is being watched closely in Australia, especially in light of various government reviews now under way into competition policy, the financial services system and a commission of audit.

Graeme Samuel concedes that privatising Australia Post is not something that can be "thrust down the electorate's throat".

"We will hear about how it will remove services from the bush, but if people look at the arguments rationally, they just don't stack up."

Another former ACCC commissioner, Stephen King, believes that the national broadband network eventually will make letters redundant.